It may take a few minutes to wrap your head around it, but this chart from Richard Koo, borrowing heavily from the insights of W. Arthur Lewis, is a pretty good framework for understanding the history of the world since the start of the industrial revolution:
For most of human history, technological progress was achingly slow, especially when it came to agricultural productivity. Unable to boost yields, populations couldn’t expand unless additional farmland were brought under cultivation. There were about as many people alive on Earth in the age of Caesar as there were more than a thousand years later. When that finally changed, farmers moved to urban factories and joined the proletariat. Read more
Sentences to warm the New Year heart, from Deutsche:
This year, China will likely face the worst fiscal challenge since 1981. We believe this is the most important risk to the economy and one that is not well recognized in the market.
Assuming the second bit is true… Read more
The best way to get less of something is to tax it, so nobody should have been surprised when Japanese GDP cratered after the sales tax was raised from 5 per cent to 8 per cent in April.
What the government didn’t expect, and what is encouraging Prime Minister Abe to delay (if not renege on) the plan to raise the tax rate to 10 per cent, was the economy’s failure to snap back. For example, the latest data show that real household consumption, excluding imputed rent, plunged by 3.5 per cent over the past 12 months to its lowest level since the Tohoku earthquake hit in 2011:
Take note. This is an important observation from TD Securities, especially in light of all the talk that US Treasury/safe haven trades are dead in the water.
Our emphasis: Read more
The fiscal cliff and “Taxmageddon” are terms for what might happen at the end of this year, when various US tax cuts and benefits expire, and the automatic “sequestration” spending cuts agreed as part of last year’s debt ceiling/Super Committee deal are due to kick in. (Cardiff explained it in more detail back in November if you want a refresher on the scale and messiness of it all.)
There have been several estimates of how this might play out — Nomura for example forecast that the expiration of the Bush tax cuts alone would reduce GDP in 2012 by 1.5 percentage points. Now the Congressional Budget Office, a non-partisan agency, has published its own analysis, which paints a picture of all of the fiscal restraint measures and expiring tax cuts shaving a massive 4 percentage points off GDP growth in 2013, making for a recessionary first half: Read more
Twenty-five of the EU’s 27 countries have signed up to a German-inspired treaty enshrining tougher fiscal rules to help underpin the euro, with the Czech Republic announcing it would join the UK by not agreeing to the pact. Reuters says Ms Merkel “cemented her political ascendency” with the treaty. But the FT reports Berlin was warned that there were limits to how much sovereignty governments could be expected to surrender for the sake of fiscal discipline. Nicolas Sarkozy, the French president, said the German proposal for the EU to control Greece’s budget decision-making “would not be reasonable, not be democratic nor would it be effective”. He said that he had confronted Angela Merkel, his German counterpart, with his views and insisted she had agreed. “The recovery process in Greece can only be enacted by the Greeks themselves, democratically,” Mr Sarkozy said. “There can be no question of putting any country under tutelage. Having spoken to the chancellor, I can tell you this is exactly her position.” However, Ms Merkel said she still believed that Greece required stricter monitoring to stick to its bail-out targets, saying Athens’ repeated failure to implement agreed reforms warranted more intensive intervention.
Goldman Sachs has updated this chart, which shows the projected impact of fiscal policy on GDP growth, to reflect its latest assumptions (see the previous version here):
Central banking and central bankers as we know them are out of touch with the modern world and ill-equipped to deal with the challenges set before them.
That is the view of Morgan Stanley’s Manoj Pradhan who argued that the current ‘DDD regime’, meaning debt, deficits and deleveraging, requires a different monetary policy strategy. Read more
Fed tightening, apparently.
(Not that there are a lot of examples to go on.) Read more
We’re late to this, but here’s a nifty chart from Goldman showing the expected fiscal drag on the US economy through next year, adjusted for the range of potential outcomes of the American Jobs Act:
The European Union should appoint a new budget tsar with powers to dictate taxes and spending in eurozone countries and who could ultimately adjudicate whether countries should be kicked out of the euro, the Dutch prime minister has argued. Writing in the Financial Times, Mark Rutte and his government’s finance minister, Jan Kees de Jager, said the new “commissioner for budgetary discipline” should be given the authority to impose a gradually more painful series of penalties on profligate eurozone countries, including the withholding of EU development funds. But if a country continues to flout EU demands for spending restraint, Mr Rutte’s plan would force eurozone countries to submit their budgets to the commissioner, who could veto it before it is presented to parliament. Over the long term, Mr Rutte said, the eurozone should force countries to leave the euro if it did not abide by the commissioner’s ruling.
A bit of eurozone-US fiscal divergence, anyone?
In a post on Tuesday the IMF blog compares its current projections for fiscal consolidation in advanced economies with those it made in November 2010. Read more
The President gave the State of the Union on Tuesday night. You may have noticed that he mentioned the future. A lot. Something about “winning” it.
But with the speech having to cover all the bases and undergoing thousands of iterations it was almost inevitably short on detail. Read more
Senate Democrats have met in private to thrash out a plan for dealing with $3,000bn of Bush-era tax cuts that expire at the end of the year, presenting an uncomfortable battleground for the party in November’s midterms, the FT reports. President Obama wants to extend the cuts for low-earners, while Republicans have pushed for them to be extended across all income classes. But there is no chance of any attempt to arrest long-term fiscal dangers if the Republicans retake power, the FT’s Martin Wolf says, given a dangerous reliance on supply-side economics.
…in the long term.
Amidst an analyst note on the difficulties of measuring fiscal policy impacts on exchange rates, Goldman has weighed in on the Great British Krona. Good news, sterling: the beatings will stop. Eventually. Read more